The Four Ds of a Business Exit Strategy The Four D's of a Business Exit Death: The issue of the death

of a small business owner should be considered during the start-up of a business. Unfortunately, during the creation of many buy/sell agreements the issue of death is only addressed at the urging of a life insurance agent. At the meeting, you arbitrarily decide how much insurance you can afford and how much your company is worth, when in fact you do not know. Disability: Death is not as likely to end the business relationship as disability. Small business survival will often take prescient over paying a disabled partner. If the person is important to the business, the financial strain impacts the business and the family who depends on the income. Divorce: You can imagine the torn feelings if a disability occurs, but what if the partners cannot get along? How do we split a partnership without financially ruining each other? It may be complicated by many personalities, some may not even be a part of the dispute, yet may be affected financially. Departure: You may all be happy working together, but your partner or you may decide to leave for another opportunity or simply to take life easier. Who is going to do the work? What is owed the leaving partner? Where is the money coming from? All important considerations for your business exit strategy. A Fair Buy/Sell Agreement For the small business owner, each one of the four Ds has special demands on: family, income, taxes, and transfer of control of assets. An agreement, commonly called buy/sell agreements, can be used to handle the four D's. The concern of the family or income can conflict with the business. The business exists as a separate entity. Reduce conflict by developing mutual fair agreements and the desired level of income. Creating a Business Exit Strategy Once you understand the four Ds, include the following actions in the creation of your business exit strategy: 1. Consider incorporating your small business to legally recognize yourself and your business as separate entities 2. Find a method of determining the value of the corporation that can be done at least annually and will qualify under IRS standards 3. Develop an employee benefit plan that will assist with the departure of each partner in case of death, disability, or retirement 4. Plan for who retains company ownership and who gets paid off

The great dream is to: build a business of your own; bring it to life; and make it successful. How you plan your small business exit strategy will determine your financial success. Just as building a successful business takes planning, hard work, and a little luck, so does leaving it. Examples of Exit Strategies This post summarizes, and categorizes, examples of exit strategies discussed elsewhere in this blog. Venture capitalists assert they have two possible exit strategies for their successful companies: an IPO or a sale. Angel investors invest earlier, and have three possible outcomes for their successful portfolio companies. From an Angel perspective, a company can either: 1. Obtain financing from a venture capital fund, 2. Be sold, or 3. Go Public. Business Exit Strategies Business exit strategies depend on the current economic environment. The relative ease of an exit through an IPO or acquisition varies every year depending on the relative appetite of the capital markets and corporate acquisitors. The Current Environment The second half of 2008 will probably go down in history as the worst, or possibly second worst, IPO market for technology companies ever. In the third quarter, there were no IPOs of venture-back companies in America. This has never happened before. It's hard to image a worse situation - it would probably have to be two quarters with no venture-back IPOs. So at this point in time, from a US perspective, there is effectively no possibility of a business exit strategy through an IPO. Being Acquired Interestingly, this is a particularly good time to do an exit with an M&A transaction. M&A transactions had their best year ever in 2007, and the first half of 2008 looked equally good. The reasons the tech M&A market has been hot are described in this post. At this point in time, from the perspective of business exit strategies, the best probability is to plan to be acquired. This will certainly shift at some point, and there will again be a time when IPOs are once again the preferred exit strategy.

Going Public - NASDAQ and TSX Many people do not consider going public to even be one of their business exit strategies. A NASDAQ exit is pretty close to being an exit. That's because a company large enough to IPO and NASDAQ is most likely going to have trading volume that would allow founders, and even venture funds, to exit over a reasonable period of time. An increasingly popular way to finance companies is through the Canadian Public Exchanges. The TSX Exchange is even calling the small cap public markets "public venture capital". This can be an excellent way to finance certain types of companies at certain times. It is, however, almost never an exit. The TSX Venture Exchange, particularly, is too small to be an effective way for founders or investors to exit companies. These markets should be considered a viable financing strategy, but for all practical purposes never one of the desirable business exit strategies. Buy Outs In earlier times it was quite common for company founders to sell their business to the employees, often financed by a leveraged buy-out. This happens very rarely in technology companies. It's extremely rare for this to be a viable exit strategy. The only time this type of strategy would be viable is in a company with extremely strong profit margins and a very predictable future. It is important that shareholders, considering a sale of their business, assess all the options available to them well in advance of undertaking a process. Good preparation is the key to a smooth exit process with no unexpected surprises. We will perform an exit strategy review, which takes into account the objectives and timescales of the shareholders and offers a carefully tailored review of the various exit options available. These may include a total or partial sale, management buy-out or buy-in, refinancing to release cash or flotation. Our approach includes conducting a balanced assessment of each option in light of the company's circumstances, the specific requirements of the shareholders, and the interests of management and staff. We then recommend the best exit strategy with a view to maximizing shareholder value, including timing and grooming. We will also assess the likely value of the business, who would be likely to buy it and identify any areas of weakness, which will need to be addressed prior to the sale of the business. These areas may include the strength of the management team, business systems, contractual arrangements with customers and suppliers and also the financial performance of the business. Our independence means that we are very happy to work with clients over the long term to achieve their objectives - even if a transaction is not anticipated for several years.

How to Choose an Exit Strategy: Considerations in Choosing an Exit The right exit strategy depends a lot on the objectives of the people who own the business. Initially, the founder(s) own 100 percent of the business. If they take on investment over time from venture capitalists, angel investors, equity investors, or individuals, they usually give up a portion of the company, or shares, and those shareholders will have a say in any potential exit strategy. The following are some of the things to consider when choosing an exit strategy:

Consider your future role in the business. Part of your decision will depend on whether or not you want to continue to manage your business. In an IPO or a management buyout, you and your team will play much the same roles before and after the transaction. In a strategic acquisition, however, the acquirer may replace you and your team with its own people. A strategic acquisition can be an excellent solution for companies that are struggling with succession-planning issues, while an IPO or a management buyout will work more effectively for teams that want to stay in charge. Evaluate your liquidity needs. Many business owners view their exit strategy as a chance to reap the benefits of their hard work and to increase their personal liquidity. However, not all exit strategies work equally well in this respect. In an IPO, for instance, your shares likely will be subject to a share lock-up agreement, which means you will not be able to sell your shares -- even after the IPO -- for a period of time, typically six months. A strategic acquisition will often generate an immediate cash payment, thereby increasing owner liquidity. Sometimes, however, the final price is not determined until the end of an earn-out period, which can last several years. In a management buyout, the original owners also generally will receive liquidity over a period of time. If you accept outside investment, you essentially take on partners, and those partners at some point are going to want liquidity. "When founders and entrepreneurs decide who to take money from it has a tremendous bearing on what the right exit strategy is," Young says. Entrepreneurs should look for good partners who don't pressure companies to sell or go public, but wait until the time is right for a liquidity event when the company has matured. Think about your company's future potential. Perhaps you do not require immediate liquidity, but want to participate in your company's future growth potential. In this scenario, you will want to choose an exit strategy that allows you to retain an ownership interest. An IPO allows you to keep a substantial interest in the company, as well as to time the ultimate disposition of your shares to meet your own personal needs. A management buyout also will allow for continued participation in a company's growth. However, an acquisition will generally eliminate, or at least greatly reduce, your ownership interest in your company, as well as your ability to influence its future direction and performance.

Consider the impact of Sarbanes-Oxley. Taking a company public now entails meeting the costly, and somewhat bureaucratic, requirements of Sarbanes-Oxley. Many private companies begin working toward these standards early on -- establishing an independent board, arranging for an independent audit, and upgrading their systems and reporting to required levels. Meeting these standards not only will allow your company to go public, but also may increase its attractiveness to strategic buyers. Assess market conditions. Demand for you company's products or services, the appetite for IPOs and acquisitions among both investors and strategic buyers, and other market conditions also will have an impact on your exit strategy. Talk with your private equity partner, as well as with any commercial lenders, investment bankers, or other financial professionals, about trends in the marketplace. The IPO market has swung back and forth since the dot-com boom in the late 1990s through the bust a few years later and on up to the most recent economic downturn, during which there were six venture capital-backed IPOs in 2008 and 12 in 2009 compared with 86 in 2007, according to the Exit Poll report by Thomson Reuters and the National Venture Capital Association. But the number of venture-backed mergers and acquisitions didn't drop off nearly as much, with 348 in 2008 and 263 in 2009 compared with 378 in 2010, the report says. "I think good companies can go public at any time," Fitzgerald says. "Some just choose not to do so in tougher markets because their initial stock price will likely be lower. In those periods you either see companies waiting for the market to return or selling to a strategic or financial acquirer." Consider a dual-track approach. Marketing your company to investors requires a slightly different approach than presenting to potential strategic buyers. Public market investors generally want to understand your company as a whole -- what your main businesses are, what your prospects for growth are -- while strategic buyers may be more interested in specific parts of your company that are complementary. Even though your pitch may be slightly different, you may wish to pursue both types of exits at the same time to capitalize on the most attractive opportunity. Once you know whether your company will be attractive to institutional investors, or whether strategic buyers are actively looking for companies like yours, consider the steps listed above, as well as the price. Then consult with investors and senior managers so you can make the right decision for everyone involved: you, your company, your employees, and your customers.